There's a lot of factors in play that make taking the home ownership plunge sound appealing. There's the $8,000 housing gift if you purchase a home (which can be used as a down payment, much to my dismay.) There's all time historic low interest rates, around 5%. Most noted, however, are all the "deals" that abound in a market. With home prices in DuPage County down 23% from their peak, it would appear that now is the time to buy!
However, I would argue that now is not the time to buy unless you are very certain you will own your property for at least five years, and definitely not the time to buy if you are looking for the best price. I repeat: We are not at the bottom of housing prices.
I have basically three reasons why I'm not buying:
1. The economy is not at the bottom. Major companies who announced layoffs in the past 6-12 months have not completed these layoffs. For those that have, many of these workers were high wage earners that received excellent severance packages and are still able to pay their mortgage. With the April 2009 unemployment rate at 8.9%, and having it increase every month, it's safe to say that foreclosures will continue to rise until this rate decreases to historical norms. This is more than one year off. Hence, I can safely choose to sign one year leases and continue to rent and not put my money into a depreciating asset. I already own two large depreciating assets, our cars. No need to add more to the list.
2. Even if the recession ended today, the housing inventory is still historically too high. With 9.8 months of inventory which took nearly two years to rise from 6.5 to 10.5 months, I don't think that we're going to see a swift turnaround. As homeowners become more desperate to sell, prices will continue downward.
What I've only seen briefly mentioned (You hear it here first!) is a recently published survey from Zillow that states 31% of homeowners would be somewhat likely, likely, or very likely to put their home up for sale if they saw signs of a real estate market turnaround in the next 12 months!
With roughly 75 million homes in the U.S. per the somewhat outdated 2000 census, this means that 75 x .31 = 23 million homes could be put for sale when the housing market "turns around". Compare this to the fact that 17 million homes where sold in the year 2006, 2007 and 2008 combined! This implies we could have up to four years of shadow inventory. The high inventory will continue downward housing prices.
3. As municipalities try to make ends meet with their budget, we can expect property taxes to increase significantly within the next several years, possibly dramatically changing the expected payments of a home. This risk and the ability to negotiate rent, compared with the complete inability to negotiate taxes, makes this another significant risk to purchasing a home today.
With all that said, I'll have to take a pass on the pulling the trigger on this one, and I advise my friends the same.
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2 comments:
Matt,
I think you are passing on a huge opportunity. Again if you are going to live in your house for 5 years or more now is a great time to by. Much better than when I bought my first house in 2000.
You can never predict the bottom of the market. Just like you can't predict the top. We may or may not be at the bottom today.
Here are some reasons I would buy today in an instant:
You don't know how long the free 8K from the fed is going to last. I never had that! I would take advantage of that in a heartbeat.
Interest rates are going to go up. It won't be long until the FED has to raise the rate to attract more foreign and domestic investment. When I bought my first house in 2000 we paid 8%! My parents paid 18% in the 70's during our last finacial meltdown. Many are suggesting it won't be crazy to see rates start climbing very soon. And they will climb high quikly any advantage you have of low housing price will be gone if you are paying a couple of points higher for 30 years.
If you are paying $1000/month on rent when you could be investing that money in equity on a house you are just flushing the money. Paying a mortgage is always a better investment the renting unless of course you are not going to live in a house for 5 years. Then you would lose money on Realtor fees assuming you are going to use one. (We did not when we bought and sold our last house so that is not a concern of ours.)
It is true my house is worth less than when I bought it. But I have not lost anymore in the last 4 years than I would have had I been paying rent. In fact I would have lost more paying the same rent somewhere else. Because I am still paying on my principal. I am planning on living here longer than 5 years. My house will go up in value will rise again. Maybe in two years maybe in 10. When it does my principal will that much lower and my equity will quickly climb. If I had been renting during that same time period my rent would have been nearly the same but I would have nothing to show for that money I spent on housing. I think that is crazy bad stewardship.
And I own a house. I don't have to put up with someone in my parking spot, noisy neighbors, bad carpet, lousy management, worrying about my neighbors burning the place down, etc.... There is much more freedom in owning a house if you can.
It would be nice to have a house. And I think both Matt and Chris make legitimate arguments.
However, the driving factor in our choice to wait isn't all about the current economy. The economy definitely is something huge to consider and has an impact on our choice. Yet, the main reason we've decided to wait is that Matt just changed jobs... and his workplace is considering a move. We know that his job will stay in the chicagoland area, but that is a large area. It'd be best to keep his daily commute down to 20 mins or less. So we just aren't ready to commit to a house this year. Maybe next year; we shall see.
Living in an apartment has some downfalls. Fortunately we've lucked out with our neighbors; they're great. (Unfortunately for them, we'll be the noisy neighbors with a crying newborn in about 6 weeks! But, you can also run into noisy neighbors with a house.) As for the management, so far, so good. Only complaint would be friends need to park a little further away because we have assigned visitor parking. Then again, that keeps our parking spaces near the door always available. And we aren't allowed to have a charcoal grill (but we can get over it).
With a house you need to also pay for all the maintenance. So that is a perk to renting. No surprises that will suddenly eat a huge hunk of money. If the dryer breaks, the management buys a new one. No leaky roof to replace. You can always expect to be paying the amount on your lease... and that's it.
And, one more apartment perk: less space to clean! I'm glad I don't have to do yard work yet and my little apartment is enough to take care of for the time being.
But, like I said before, what it really comes down to is we don't know WHERE we want to buy a house yet. So we need the flexibility of renting.
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